RATE OF SAVINGS VS. RATE OF RETURN

Author: David M. Greenberg Integrated Planning Concepts 973-994-7155

Fact or Fiction?  In order to achieve a high reward on your money, you have to accept high levels of risk.

FICTION. The truth is, achieving a high overall reward on your money is possible while taking minimal risks. For years, common investing wisdom has promoted the idea that high risks lead to high returns, but in reality, many people experienced low rewards for taking high risk. It is often assumed that high risk investments will automatically generate high returns, leading you to believe that you will have much more money in your future as a result. When you plan on having a large return you might end up actually saving a much lower percentage of your income than you should be.

High risk doesn’t always equal high reward
It is common to hear a misconception that traditional financial planning offers; in order to achieve a specific financial goal, high risk products are the way to go. Many people build their financial futures based upon the hope that they’ll be in the right place at the right time with their retirement nest egg. There are many factors that affect your future such as rising taxes, life events and stock market fluctuations. All of these things cannot be monetized or computed with a mathematical equation to get an exact number as to how much you should have in retirement. Financial planning need and goal calculations suggest you don’t have to save as much, as long as you’re investing your money.  But it’s not just about taking the high risk with your money, it’s also how much that risk is actually costing you. For example, there are factors such as taxes, fees, debt and lifestyle expenses that all have to be considered when determining your actual return. Decisions with your money need to be much more certain in nature and the only thing you can control is how much you save.

So what can you do to get ahead and stay ahead?
Focus more on your rate of savings than on your rate of return. The better you are at putting money away, the less dependent you may be on needing high returns and taking on high levels of risk. If you feel like you are fighting an uphill battle as you build your net worth, and you feel like you aren’t making any progress, ask yourself these questions…How much money did I save/invest last year as a percentage of my income? What is the right amount of money to save? If you find yourself saving a lower percentage of your income, there may be a temptation to turn to higher risk investments to help close the gap as you plan for retirement. By setting a goal to save more, you can be in more control over your financial future. Since rates of return are so unpredictable, saving the right amount each year may actually allow you to lower the amount of risk you take. You work hard for your money and it shouldn’t all be put at risk in hopes of a high payout.

Become a saver before becoming an investor.
Today, it is all too common for people to invest in market based investments before using guaranteed assets. This approach may not only encourage high levels of risk and volatility, but might also leave you without enough accessible money to respond to changing life events. There is no way to predict what may happen tomorrow and you could suddenly be faced with events such as an unexpected job loss, a medical emergency, or an opportunity to start a business. Before taking high risks with your hard earned money, or setting aside funds in illiquid accounts, focus on the following:
• Become a world class saver by setting aside 15-20% of your gross income.
• Accumulate one year of household income in accounts you can easily access.
• Protect your balance sheet and cash flows against life events that could wipe out your ability to save and wipe out the money you’ve already saved.
• Become more efficient by lowering taxes and other expenses that can erode savings and investment returns.
 
Rather than hoping for an attractive high rate of return on your money, and accepting the high risks that come with it, focus on these steps to lead you toward a more positive road to building wealth. Always remember, your rate of savings is more important than your rate of return.
 
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